When Is a Tax Not a Tax? When It's Needed to Prevent Economic Catastrophe

Last Updated Jul 11, 2011 4:58 PM EDT

The fate of the U.S. economy hangs on House Speaker John Boehner's ability to redefine the word "tax" enough to give the rest of the GOP plausible deniability. Uh oh.

This is likely to come from an alchemy between tax hikes revenue increases and the Alternative Minimum Tax. If Boehner can convince enough House Republicans that a change to the AMT is a tax "cut" that balances out "revenue positive actions" like ending tax breaks for corporate jets, yachts and race horses, or cutting farm subsidies, or whatever else, then a grand bargain on cutting the deficit may still be possible.

Alternatively, the U.S. economy may crash into a wall as soon as Aug. 2 if the GOP-controlled House refuses to raise the federal debt ceiling. Orwellian word games or global thermoeconomic destruction -- those are our choices these days. Take your pick.

Alternative Minimum Huh-What?
In case your preferred summer reading is something besides the U.S. tax code, Jonathan Chait has a fine explanation of the AMT:
The "Alternative Minimum Tax" is kind of a parallel tax rate, created in 1969, designed to ensure that very rich taxpayers didn't amass so many deductions that they could avoid paying any taxes. If your tax rate falls below your "alternative minimum tax rate," then you have to pay the AMT rate instead. It's sort of a failsafe tax rate.
With the passage of time, the AMT has fallen out of synch with reality -- the fiscal equivalent of a lunar calendar which, unadjusted, would eventually give you Christmas in July. The AMT now hits people who would in no other way qualify as rich, especially if they live in high-tax states.

Congress has made hit and miss efforts to change this by adding the equivalent of a day here and there. As a result the assumptions of budget projections based on our current law is that the AMT will continue to be out of synch and hit people at ever lower income levels with higher taxes. Because of this, those projections show the deficit rising to a much more modest level.

However, budget projections that are based on what Congress actually does -- i.e., continually fixing the AMT to stop it from snaring middle-class taxpayers -- show us with a deficit even more gargantuan than what we already have. According to Time's Jay Newton-Small, Boehner has to convince enough of his fellows that this will let them say they didn't vote for a net tax hike but "voted to close some loopholes and plow the revenue back into other tax reductions."

Through the looking glass
Boehner is in this position because George Bush the 1st's breaking of his "No New Taxes" pledge -- in service of deficit reduction, natch -- stands as the true defining moment for American conservatives. It is a point of honor on which they refuse to alter their course no matter how big the iceberg ahead. GOP noisemaker Grover Nordquist has pledged to excommunicate any who would waver from this point of principle, and for some reason the pols treat his threats like he's a combination of the AARP and National Rifle Association.

While previous House Speakers like Nancy Pelosi and Dennis Hastert could have cracked the whip to get the job done, Boehner cannot. Unlike other recent Speakers, he's stuck riding the herd and not driving it. This is partly the result of Boehner's personal style, but a much bigger factor is the 87-member Tea-Party flavored freshman class of 2010. These reps are firm believers in less government and lower taxes. Even if they can't get the first, they're determined to manage the second, damn the consequences.

In the end this will all come down to that now-classic phrase of American politics, "It all depends on what you mean by the word 'is'."

Image: WikiCommons
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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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